Industrial strategy and successful trade talks paramount for recovery
16 September: ICAEW has called on the government to focus on a ‘future jobs’ industrial strategy and securing a successful outcome to EU trade talks to help the UK recover from the economic effects of the pandemic.
The call comes in the wake of new research examining the impact of the coronavirus pandemic on different regions and sectors of the economy.
ICAEW’s UK Economic Outlook report, commissioned from forecasters Oxford Economics found that following the record 20.4% quarter-on-quarter GDP contraction in Q2, there are now signs that a fragile recovery is beginning to take shape.
Monthly data sets indicate that GDP bottomed-out as early as April, during the peak of lockdown, and rebounded strongly in June as social restrictions were retracted. Oxford Economics projects that UK GDP will rise by 9.1% in 2021 after a 9.9% fall in 2020.
However, the research group cautioned that risks to the recovery are high, with a second wave of coronavirus, faltering EU-UK trades talks and general economic confidence chief among them.
Commenting on the report, ICAEW Chief Executive Michael Izza stated that a successful outcome to UK-EU trade talks is vital for the recovery and called on the government to ensure the economic landing is as soft as possible.
“The Chancellor’s autumn budget should be a social, education and industrial strategy which combines protection and retraining for displaced workers over the short and medium-term, with intervention and investment to create jobs with a future, especially in the green and scientific sectors,” said Izza.
Andrew Goodwin, Chief UK Economist at Oxford Economics, cautioned that although the labour market has been resilient to the collapse in output so far, the end to the government’s Job Retention Scheme in October is likely to be a “game-changer”.
“We expect unemployment to rise from just under 4% in the summer to 6.5% by the end of the year,” said Goodwin.
Regional impact
The report stated that Wales, the West Midlands and Yorkshire and the Humber are likely to see the biggest contractions in employment this year as they are more reliant on manufacturing jobs than other areas.
Wales, for example, is one of the most manufacturing-dependent parts of the UK and also has a sizeable trade dependence, so although Oxford Economics forecasts that employment will recover strongly in 2021, the number of jobs in Wales is still likely to be lower in 2021 than in 2019, at 1.45m compared with 1.49m.
In London, a larger proportion of employees are office-based and therefore able to adopt home working, with the region unsurprisingly experiencing the smallest fall in employment. However, the number of jobs is still likely to be lower in 2020 at 6.0m, compared with 6.05m in 2019.
Sector impact
Some sectors of the economy have been hit harder than others by the effects of the pandemic, and this would have a particular impact in regions with a high number of jobs in hospitality and manufacturing, according to the report.
In Q2 2020, exports of machinery and transport equipment were down 32.6% year-on-year; among the most severe falls of all sectors of traded goods. According to the report, this reflects the range of challenges facing the sector, including huge disruptions to supply-chain networks, as well the direct closure of factories, car showrooms, the extreme problems of the airline sector and the collapse in the civil airliner market.
Meanwhile, manufacturing businesses that produce goods in high demand, such as medical supplies and chemical products, were relatively protected. The chemicals sector, for example, saw a sharp rise in exports, relative to a year ago. The sector is particularly benefitting from strong international demand for cleaning products, together with plastic items including personal protective equipment, containers and wrappings, and of course pharmaceuticals, in which the UK has a specialism.
The report also predicted that the number of jobs in arts, entertainment and recreation would contract by 8.3% in 2020 compared to 2019, while jobs in accommodation and food would contract by 8.9%.
In the longer-term, the report forecast that the number of UK jobs would return to pre-crisis levels in most regions in 2022. According to Oxford Economics, by 2025, employment in manufacturing would be 8.8% below 2019 levels – this is likely to be lower not only because of the impact of coronavirus, but also due to ongoing factors such as automation, the demand for services relative to goods, and jobs moving overseas.
Great uncertainty around UK-EU negotiations
Complicating the picture still further are the UK-EU trade negotiations. The report highlights “great uncertainty” over whether a free trade deal can be agreed.
“If not, businesses will face increases in both tariff and non-tariff barriers, which in the most severely affected sectors will materially damage their competitiveness,” continued the report. “Even under a free trade agreement, some disruption is very likely. And these same remarks apply to trade with the rest of the world, and not just with the EU.”
Click here to read the full report.